The train of thought with regard to pensions have been undergoing a remarkable evolution: from the low-speed omnibuses and steam engines of domestic retirement provision to the high-speed electric engines of cross border arrangements.
But no matter how fast cross-border-career passengers travel, every time they get on and off the retirement train at different national stations, they are monotonously reminded to ‘mind the gap’ – the gap in cross-border retirement provision. The more they travel, the more they feel that legislative bodies should come up with solutions which eventually would ‘mend the gap’.
The adoption of the EU Directive on the Institutions for Occupational Retirement Provision (IORP) is expected to help the implementation of the basic freedoms of the EU. EU citizens would be able to use the services of a pan-European pension plan and thus their movement within the union would not be handicapped by cross-border pension restrictions. However, their movement between an EU country and a non-EU country would not be ‘free’. If it is not feasible to abolish non EU countries’ national restrictions on cross-border retirement provision, it may be worth considering the possibility of pension companies offering citizens identical retirement provision services through international franchising.
The free movement of people, services and capital already requires possibilities for international business cooperation between the institutions involved in private pension fund management. International franchising in private retirement provision as a method for entering a foreign retirement provision market – is this possible? What are the weaknesses and strengths?
International franchising between private pension companies could be defined as an agreement between legally and economically independent privately managed institutions for retirement provision based in different countries, in terms of which one of the contractors, the so called ‘franchiser’, shall concede to the other contractor, called ‘franchisee’, the right to reproduce its retirement provision business within a certain territory, for a certain period of time, under certain conditions and for a certain remuneration.
The international franchising in private retirement provision possesses the following advantages:
o Quick entrance into a new market: Pension business requires investments in various activities, such as contribution collection, asset management and benefit payment. To enter a new
market, the pension company franchiser will not need direct investment. Instead, it could concede the right for reproduction of its business to local pension companies which possess the necessary resources and are already present at those markets.
o Quick exit from a market: Besides the well-known factors (coming from demographic situations and unemployment) which aggravate retirement market conditions, there are also a number of others which are highly unpredictable because of their political implications, for example, abolition of tax incentives, state interference in pension fund investment policy, and sometimes – even nationalisation. Thanks to the absence of any direct investment, including in real estate and technical equipment under an international franchising agreement, the pension company franchiser will be able to quit any market faster and more easily than under other forms of business operation.
o Full control over the operative work: Under the franchising agreement, the pension franchiser would have the right to exercise overall preventive and current control regardless of the legal independence of the franchisee.
o Minimum investments: An international retirement provision franchise allows a pension company franchiser to widen its activity far above its own capital means, making use of the franchisee’s resources.
o Overcoming the regulatory restrictions and a possibility to benefit from tax incentives: National governments are notorious for the establishment of protective barriers against the access of foreign companies to their national retirement provision markets. Through an international franchising agreement, the retirement provision will be implemented by local pension companies and will not be affected directly by most national restrictions. This flexible form of international cooperation allows the franchiser to derive indirect benefits (through the franchising remuneration which the franchisee pays to the franchiser) from tax incentives and other preferences given to local entities for stimulating the development of retirement provision business in their national territories.
For the pension company franchisee the advantages are well known: a franchisee will not bother about the creation of a new business, about the development and maintenance of its own trade mark and image. The franchisee receives the respective ‘know-how’ support by the franchiser.
For the pension company franchiser, the difficulties and risks, associated with franchising operations, come from the lack of potential franchisees with developed business knowledge and skills, unfavourable business climate, negative attitude by the society etc. For the pension company franchisee the risks are associated with the high value of the franchising package, inexpedient and unfeasible requirements by the franchiser and a high degree of dependence on the franchiser in decision taking.
An excellent knowledge of the difficulties and the clever management of the risks in the implementation of international franchising in private retirement provision are prerequisites for overcoming the existing protective barriers against the access of foreign companies to national retirement provision markets.
International franchising in private retirement provision respects national differences, ie, pension companies franchisees will continue to abide by the national labour, social and tax laws of their countries. At the same time pension fund members will enjoy identical retirement provision services when they move between countries.
Waiting for their retirement trains at different national stations and weary of the monotonous reminding announce-ments, more and more cross-border mobile workers are coming to share a common dream: mind… mend... after all, why not... end the gap in cross-border retirement provision. Will their dream come true in time? Nobody knows for certain but it is worth a try because the clock is ticking our last-minute conventional efforts off and the retirement train is soon to arrive.
Nickolai Slavchev is chief retirement schemes analyst with Allianz Bulgaria Pension Company in Sophia